W.P. No. 672 of 2017IN THE HIGH COURT AT CALCUTTA

Constitutional Writ JurisdictionOriginal Side

Akshay Jhunjhunwala & Anr.Vs.

Union of India through the Ministry ofCorporate Affairs & Ors.

For the Petitioners : Mr. S.N. Mukherjee, Sr. Advocate. Mr. Ratnanko Banerjee, Sr. Advocate

Mr. Shounak Mitra, Advocate Mr. A. Chowdhury, Advocate

Mr. Sambhik Chowdhury, Advocate Mr. D. Majumder, Advocate

For the Respondent : Mr. Gyanendra Kumar, AdvocateNo. 2 Ms. Rituparna Chatterjee, Advocate

For the Respondent : Mr. Kaushik Chandra, Addl. Solicitor GeneralNos. 1 and 3 Mr. Jatinder Singh Dhatt, Advocate

Hearing concluded on : December 15, 2017Judgment on : February 2, 2018

DEBANGSU BASAK, J.:-

The petitioners have assailed the vires of Sections 7, 8 and 9 of the

Insolvency and Bankruptcy Code, 2016.

Learned Senior Advocate appearing for the petitioners has

submitted that, the second respondent is a corporate debtor in respect

of whom a proceeding under the Code of 2016, is pending adjudication

before the National Company Law Tribunal (NCLT), Kolkata. The Code of

2016, according to him, makes a distinction between a financial creditor

and an operational creditor in respect of a corporate debtor which does

not have a rational and intelligible basis. The differentiation between the

two categories of creditors being unintelligible and irrational, the

provisions of Sections 7, 8 and 9 of the Code of 2016 should be struck

down. He has submitted that, undue preference has been given to a

financial creditor. A financial creditor has a right to be in the Committee

of Creditors (COC) of a corporate debtor in an insolvency proceeding. An

operational creditor, although such creditor may have a claim far in

excess than that of the financial creditor, will have no say in the

Committee of Creditors. In a given situation, a corporate debtor may

have only one financial creditor. Such financial creditor will constitute

COC, without any participation from any other category of creditors of a

corporate debtor including that of an operational creditor, although such

operational creditor in a given case may have a claim in excess of the

financial creditor and the number of operational creditors may exceed

the number of financial creditors. Such a distinction between two

categories of creditors in respect of the same financial debtor is unjust,

unfair, impracticable, irrational and ought not to be countenanced by a

Court. The distinctions sought to be introduced by the Code of 2016 in

respect of a financial and an operational creditor for corporate debtor

has been highlighted by the learned Senior Advocate for the petitioners.

He has referred to Sections 3(6), (10), (11), (12), Section 5(6), (7), (8), (20)

(21), Section 6, Section 7, Section 8 and Section 9 of the Code of 2016 in

this regard.

Learned Senior Advocate for the petitioners has submitted that, the

Code of 2016 does not empower the adjudicating authority to look into

the validity and sufficiency of a claim lodged by a financial creditor

whereas a deeper and a better scrutiny is sought to be introduced in

respect of an operational creditor. In both the events, learned Senior

Advocate for the petitioners has submitted that, the scope of enquiry as

contemplated under the Code of 2016 or at least as the learned

Presiding Officers of NCLTs seek to enforce, are within such extreme

limited parameters that, justice so far as a corporate debtor is concerned

stands affected. He has submitted that, a corporate debtor does not have

a platform on which the corporate debtor can get on board along with its

creditors to face and challenge the validity, sufficiency, legality and the

quantum of the claim leveled against it by any category of creditor, be it

the financial or the operational one. In case of an operational creditor,

however, the Code envisages a slightly better position for a corporate

debtor although such so-called better position is also insufficient.

According to him, Section 7 of the Code of 2016 as it stands today does

not permit a corporate debtor to claim either set off or make a counter

claim, a valid defence against the financial creditor. A corporate debtor

does not have a platform to contend that, it has a valid ground so as to

deny the liability towards the financial creditor. He has given few

examples where the Code of 2016 is lacking. He has submitted that, by

reason of Section 231 and 238 of the Code of 2016, the corporate debtor

and in fact, no stake holder connected or concerned with the corporate

debtor, can approach any other forum for the purpose of obtaining an

injunction against a proceeding pending before a Tribunal under the

Code of 2016.

Learned Senior Advocate for the petitioners has submitted that, the

distinction sought to be introduced by the Code of 2016 between a

financial creditor and an operational one is without any basis. The claim

of the operational creditor and its money value would, in a given case, be

of the same quality and value than that of the financial creditor. The

financial creditor should also be visited with the same rigours as visited

in case of an operational creditor. Therefore, the difference introduced by

the Code of 2016 is not on an intelligible criterion. Drastic consequences

of the Code of 2016 aggravate the unequalness amongst the creditors.

He has referred to 2017 Volume 203 Company Cases page 442 ( Sree

Metaliks Ltd. & Anr. v. Union of India & Anr.), 2017 Supreme

Court Cases Online (SC) page 1025 (M/S. Innoventive Industries Ltd.

v. ICICI Bank & Anr.), 2017 Supreme Court Cases Online (SC) page

1154 (Mobilox Innovations Private Limited v. Kirusa Software

Private Limited) in support of his contentions.

Learned Senior Advocate for the petitioners has highlighted the

proceedings under the Code of 2016. He has submitted that, the post

admission stage of an insolvency petition commences upon the

insolvency application being admitted by NCLT. He has referred to

Sections 21, 30, 31 and 53 of the Code of 2016 as well as Regulation 37

of the Insolvency and Bankruptcy Board of India (Insolvency Resolution

Process for Corporate Persons) Regulations, 2016 in support of his

contentions. According to him, the differentiation introduced in the Code

of 2016 in respect of financial and operational creditors should be held

to be a differentiation without any intelligible basis and struck down.

The petition has been opposed by respondents. Learned Advocate

appearing for the second respondent has submitted that, there is a

paradigm shift in the conception of insolvency and bankruptcy

proceedings in respect of a legal entity as well as a natural person.

According to him, previously the secured creditors used to get preference

in the insolvency proceedings. Preference was also given to the claims of

workers as also to the statutory dues. Under the Code of 2016, there is

an innovative and paradigm shift in the priorities of creditors. It was felt

that, the Companies Act, 1956, the Sick Industrial Companies (Special

Provisions) Act, 1985, Provisional Insolvency Act, 1920 and other laws

relating to Insolvency, did not end in the desired level of success as an

over emphasis was given to secured creditors, statutory creditors and

workers. He has submitted that, the Court should be slow in striking

down an Act of a legislature, duly empowered to pass the legislation, if it

is in fiscal or economic domain. In the present case, the competence of

the parliament in passing the impugned legislation is not under

challenge. The impugned legislation is in the economic field. The Courts

have recognized that, in fiscal or tax statutes, a greater latitude is given

than other statutes. He has relied upon 2000 Volume 5 Supreme

Court Cases page 471 (Bhavesh D. Parish & Ors. v. Union of India)

and 2008 Volume 4 Supreme Court Cases page 720 (Government of

Andhra Pradesh & Ors. v. P. Laxmi Devi) in support of his

contentions.

Learned Advocate for the second respondent has highlighted the

background in which the Code of 2016 had come into being. He has

referred to the report of the Bankruptcy Committee chaired by Dr. T.K.

Viswanathan. He has highlighted some of the findings in such report. He

has placed the passages where the committee considers the distinctions

in the treatment of financial creditors and operational creditors. He has

submitted that, the committee in such report had found that, there was

a distinction in the nature of a debt of an operational creditor with that

of the financial creditor. Experience has shown that, claim of a financial

creditor is more or less uncontested while a claim of an operational

creditor may have various angles which may require further

adjudication. A claim of an operational creditor can be disputed. He has

referred to Innoventive Industries Limited (supra) and has submitted

that, the Supreme Court had considered the Code of 2016 and did not

find anything wrong with the distinction between a financial and an

operational creditor. He has referred to the various provisions of the

Code of 2016 and has submitted that, the Code of 2016 requires the

adjudicating authority to look into a valid dispute raised. Innoventive

Industries Limited (supra) has recognized that, a valid dispute is to be

looked at by the adjudicating authority in the manner as noted therein.

So far as participation in COC is concerned, according to the

learned Advocate for the second respondent, the Code of 2016 recognizes

the right of an operational creditor to participate in a meeting of COC

without the right to vote if such operational creditor has a claim in

excess of 10% of the total liability of the corporate debtor. According to

him, the threshold of 10% prescribed under the Code of 2016 seeks to

remove fringe players. Fringe players if taken on board are likely to

create difficulties in the expeditious resolution of an insolvency

situation. The Code of 2016 seeks to keep the legal entity alive while

trying to resolve the insolvency issue of such legal entity as expeditiously

as possible. It prescribes time limit for doing things specified under the

Code of 2016. Although, the time limit prescribed under the Code of

2016 can be held to be directory rather than mandatory, then also, by

reason of requirement on the adjudicating authority or the insolvency

professional or any other designated authority to come up with a plan

for insolvency resolution at the earliest, the Code of 2016 in its essence

seeks to address an insolvency issue of a legal entity as expeditiously as

possible so as to permit it to survive. In the event, the insolvency issue

cannot be resolved as contemplated under the Code of 2016 then such

legal entity is sent into liquidation. It is unlike the Companies Act, 1956.

Under the Companies Act, 1956, a company would be put to liquidation

once the winding up petition presented was admitted. Learned Advocate

for the second respondent has relied upon Section 30 of the Code of

2016 and Regulation 38 of the Insolvency and Bankruptcy Board of

India (Insolvency Resolution Process for Corporate Persons) Regulations,

2016 to contend that, the interest of operational creditors are fully

protected.

So far as the principles of natural justice are concerned, learned

Advocate for the second respondent has submitted that, the Code of

2016 contemplates a notice to be given to the corporate debtor under

Rule 4(3) in respect of operational creditors under the Insolvency and

Bankruptcy (Application to Adjudicating Authority) Rules, 2016.

Therefore, even prior to the presentation of a petition of insolvency, a

corporate debtor has adequate notice of the default so as to permit the

corporate debtor to resolve the insolvency situation. The entire emphasis

under the Code of 2016 is to resolve an insolvency situation of a legal

entity as expeditiously as possible. Therefore, the corporate debtor is

having an opportunity to resolve the insolvency issue even prior to a

petition for insolvency being presented against it before the NCLT. In the

event of an insolvency petition being presented against the corporate

debtor under Sections 7 or 9 of the Code of 2016, as the situation may

require, the adjudicating authority has to admit or reject such

application within 14 days from the date of presentation. Neither of the

two sections excludes the applications on principles of natural justice.

Principles of natural justice can be read into a statue unless expressly

excluded. On such principle, it cannot be contended that, Sections 7

and 8 obviates the requirement of adherence to the principles of natural

justice. He has also relied upon Sree Metaliks Limited & Anr. (supra)

in support of his contentions. Learned Advocate for the second

respondent has submitted that, unlike the previous statutes, the “divine

right” of promoters or shareholders of a company to control and manage

a company are no longer held at a high pedestal. Such right is

recognized till such time the legal entity is in a position to discharge its

liability. Once an element of insolvency creeps into the functions of the

company, the right of the shareholders to manage the company is kept

in suspended animation till such time the insolvency issue is resolved.

Once the insolvency issue is resolved, the right of the shareholders to

manage the company revives. The Code of 2016 seeks to send a message

to the shareholders of the company that, so long as the company is

discharging its liabilities, the shareholder will continue to have a right of

management. The shareholders will have their right to manage the

company suspended when there is an insolvency issue till the insolvency

problem is resolved. The Code of 2016 provides a time frame for the

resolution of the insolvency issues as expeditiously as possible. He has

referred to the various passages of Innoventive Industries Limited

(supra) in support of his contentions. He has contended that, no relief

should be granted to the petitioners.

Learned Additional Solicitor General appearing for the Union of

India has submitted that, Code of 2016 cannot be struck down to be

ultra vires as sought to be contended on behalf of the petitioners. He has

relied upon 2016 Volume 2 Supreme Court Cases page 226 (Director

General of Foreign Trade v. Kanak Exports & Anr.) and has

submitted that, experimentation is permissible in economic matters. The

Code of 2016 has introduced new ideas and course corrections with

regard to resolution of insolvency of legal entities and natural persons.

Legislature is entitled to undertake such experimentations. The Court

should be slow in striking down legislations with regard to an economic

matter. Referring to 1981 Volume 4 Supreme Court Cases page 675

(R.K. Garg v. Union of India) he has submitted that, possibility of an

abuse of a piece of legislation is no ground for it being struck down as

ultra vires the Constitution of India. Referring to 2012 Volume 6

Supreme Court Cases page 312 (State of Madhya Pradesh v.

Rakesh Kohli & Anr.) learned Additional Solicitor General has

submitted that, unless the Court is shown that, there is a flagrant

violation of the Constitution of India by a provision of a statue, the Court

should not intervene. The Court should presume the constitutionality of

a statute. Referring to 2009 Volume 12 Supreme Court Cases page

491 (Satish Kumar Batra & Ors. v. State of Haryana) learned

Additional Solicitor General has submitted that, abuse of an enactment

is no ground to declare it ultra vires the Constitution of India.

Consequently, he has submitted that, the petitioners are not entitled to

any relief.

The parties have referred to the following provisions of the Code of

2016 for consideration:-

“3. Definitions.- In this code, unless the context otherwiserequires, -

(1)………………………………………………………………………

(2)……………………………………………………………………..

(3)……………………………………………………………………..

(4)……………………………………………………………………..

(5)……………………………………………………………………..

(6) “claim” means –

(a) a right to payment, whether or not such right isreduced to judgment, fixed, disputed, undisputed,legal, equitable, secured or unsecured;

(b) right to remedy for breach of contract under anylaw for the time being in force, if such breach givesrise to a right to payment, whether or not such rightis reduced to judgment, fixed, matured, unmatured,disputed, undisputed, secured or unsecured;

(7)……………………………………………………………………..

(8)……………………………………………………………………..

(9)……………………………………………………………………..

(10) “creditor” means any person to whom a debt is owedand includes a financial creditor, an operational creditor, asecured creditor, an unsecured creditor, creditor and adecree-holder;

(11) “debt” means a liability or obligation in respect of aclaim which is due from any person and includes afinancial debt and operational debt;

(12) "default" means non-payment of debt when whole orany part or instalment of the amount of debt has becomedue and payable and is not repaid by the debtor or thecorporate debtor, as the case may be;…………………………”

“5. Definitions.- In this Part, unless the contextotherwise requires,—

(1)…………………………………………………………………….

(2)…………………………………………………………………….

(3)…………………………………………………………………….

(4)…………………………………………………………………….

(5)………………………………………………………………….…

(6) "dispute" includes a suit or arbitration proceedingsrelating to —

(a) the existence of the amount of debt;

(b) the quality of goods or service; or

(c) the breach of a representation or warranty;

(7) "financial creditor" means any person to whom afinancial debt is owed and includes a person to whomsuch debt has been legally assigned or transferred to;

(8) "financial debt" means a debt alongwith interest, if any,which is disbursed against the consideration for the timevalue of money and includes —

(a) money borrowed against the payment of interest;(b) any amount raised by acceptance under anyacceptance credit facility or its de-materialisedequivalent;

(c) any amount raised pursuant to any note purchasefacility or the issue of bonds, notes, debentures, loanstock or any similar instrument;

(d) the amount of any liability in respect of any leaseor hire purchase contract which is deemed as afinance or capital lease under the Indian AccountingStandards or such other accounting standards asmay be prescribed;

(e) receivables sold or discounted other than anyreceivables sold on nonrecourse basis;

(f) any amount raised under any other transaction,including any forward sale or purchase agreement,having the commercial effect of a borrowing;

(g) any derivative transaction entered into inconnection with protection against or benefit fromfluctuation in any rate or price and for calculating thevalue of any derivative transaction, only the marketvalue of such transaction shall be taken into account;(h) any counter-indemnity obligation in respect of aguarantee, indemnity, bond, documentary letter ofcredit or any other instrument issued by a bank orfinancial institution;

(i) the amount of any liability in respect of any of theguarantee or indemnity for any of the items referredto in sub-clauses (a) to (h) of this clause;

(9)………………………………………………………….…..

(10)………………………………………………………..…..

(11)……………………………………………….……………

(12)……………………………………………………………..

(13)…………………………………………………………….

(14)…………………………………………………………….

(15)……………………………………………………….……

(16)……………………………………………………………

(17)……………………………………………………………

(18)………………………………………………..…………..

(19)…………………………………………………..………..

(20) "operational creditor" means a person to whoman operational debt is owed and includes any personto whom such debt has been legally assigned ortransferred;

(21) "operational debt" means a claim in respect ofthe provision of goods or services includingemployment or a debt in respect of the repayment ofdues arising under any law for the time being in forceand payable to the Central Government, any StateGovernment or any local authority;……………………..”

“6. Persons who may initiate corporate insolvencyresolution process.- Where any corporate debtor commits adefault, a financial creditor, an operational creditor or thecorporate debtor itself may initiate corporate insolvencyresolution process in respect of such corporate debtor in themanner as provided under this Chapter.

7. Initiation of Corporation insolvency process byfinancial creditor.- (1) A financial creditor either by itself orjointly with other financial creditors may file an application forinitiating corporate insolvency resolution process against acorporate debtor before the Adjudicating Authority when adefault has occurred.

Explanation.—For the purposes of this sub-section, adefault includes a default in respect of a financial debt owednot only to the applicant financial creditor but to any otherfinancial creditor of the corporate debtor.

(2) The financial creditor shall make an applicationunder sub-section (1) in such form and manner andaccompanied with such fee as may be prescribed.

(3) The financial creditor shall, along with theapplication furnish —

(a) record of the default recorded with theinformation utility or such other record orevidence of default as may be specified; (

b) the name of the resolution professionalproposed to act as an interim resolutionprofessional; and

(c) any other information as may be specified bythe Board.

(4) The Adjudicating Authority shall, within fourteendays of the receipt of the application under sub-section (2), ascertain the existence of a default fromthe records of an information utility or on the basis ofother evidence furnished by the financial creditorunder sub-section (3).

(5) Where the Adjudicating Authority is satisfied that-

(a) a default has occurred and the applicationunder sub-section (2) is complete, and there isno disciplinary proceedings pending against theproposed resolution professional, it may, byorder, admit such application; or

(b) default has not occurred or the applicationunder sub-section (2) is incomplete or anydisciplinary proceeding is pending against theproposed resolution professional, it may, byorder, reject such application:

Provided that the Adjudicating Authority shall,before rejecting the application under clause (b)of sub-section (5), give a notice to the applicantto rectify the defect in his application withinseven days of receipt of such notice from theAdjudicating Authority.

(6) The corporate insolvency resolution process shallcommence from the date of admission of theapplication under sub-section (5).

(7) The Adjudicating Authority shall communicate —

(a) the order under clause (a) of sub-section (5)to the financial creditor and the corporatedebtor;

(b) the order under clause (b) of sub-section (5)to the financial creditor,

within seven days of admission or rejection ofsuch application, as the case may be.

8. Insolvency resolution by operational creditor.- (1)An operational creditor may, on the occurrence of a default,deliver a demand notice of unpaid operational debtor copy of aninvoice demanding payment of the amount involved in thedefault to the corporate debtor in such form and manner as maybe prescribed.

(2) The corporate debtor shall, within a period of ten daysof the receipt of the demand notice or copy of the invoicementioned in sub-section (1) bring to the notice of theoperational creditor —

(a) existence of a dispute, if any, and record of thependency of the suit or arbitration proceedings filed beforethe receipt of such notice or invoice in relation to suchdispute;

(b) the repayment of unpaid operational debt—

(i) by sending an attested copy of the record ofelectronic transfer of the unpaid amount from thebank account of the corporate debtor; or

(ii) by sending an attested copy of record thatthe operational creditor has encashed a chequeissued by the corporate debtor.

Explanation.—For the purposes of this section, a "demandnotice" means a notice served by an operational creditor to thecorporate debtor demanding repayment of the operational debtin respect of which the default has occurred.

9. Application for initiation of corporationinsolvency resolution process by operational creditor.- (1)After the expiry of the period of ten days from the date of

delivery of the notice or invoice demanding payment under sub-section (1) of section 8, if the operational creditor does notreceive payment from the corporate debtor or notice of thedispute under sub-section (2) of section 8, the operationalcreditor may file an application before the AdjudicatingAuthority for initiating a corporate insolvency resolution process.

(2) The application under sub-section (1) shall be filed insuch form and manner and accompanied with such fee as maybe prescribed.

(3) The operational creditor shall, along with theapplication furnish —

(a) a copy of the invoice demanding payment ordemand notice delivered by the operational creditor to thecorporate debtor;

(b) an affidavit to the effect that there is no noticegiven by the corporate debtor relating to a dispute of theunpaid operational debt;

(c) a copy of the certificate from the financialinstitutions maintaining accounts of the operationalcreditor confirming that there is no payment of an unpaidoperational debt by the corporate debtor; and

(d) such other information as may be specified.

(4) An operational creditor initiating a corporate insolvencyresolution process under this section, may propose a resolutionprofessional to act as an interim resolution professional.

(5) The Adjudicating Authority shall, within fourteen daysof the receipt of the application under sub-section (2), by anorder —

(i) admit the application and communicate suchdecision to the operational creditor and the corporatedebtor if,—

(a) the application made under sub-section (2) iscomplete;

(b) there is no repayment of the unpaid operationaldebt;

(c) the invoice or notice for payment to the corporatedebtor has been delivered by the operational creditor;

(d) no notice of dispute has been received by theoperational creditor or there is no record of dispute inthe information utility; and

(e) there is no disciplinary proceeding pendingagainst any resolution professional proposed undersub-section (4), if any

(ii) reject the application and communicate suchdecision to the operational creditor and the corporatedebtor, if —

(a) the application made under sub-section (2) isincomplete;

(b) there has been repayment of the unpaidoperational debt;

(c) the creditor has not delivered the invoice or noticefor payment to the corporate debtor;

(d) notice of dispute has been received by theoperational creditor or there is a record of dispute inthe information utility; or

(e) any disciplinary proceeding is pending againstany proposed resolution professional:

Provided that Adjudicating Authority, shall before rejectingan application under sub-clause (a) of clause (ii) give a notice tothe applicant to rectify the defect in his application within sevendays of the date of receipt of such notice from the adjudicatingAuthority.

(6) The corporate insolvency resolution process shallcommence from the date of admission of the application undersub-section (5) of this section.”

The Code of 2016 deals with insolvency of legal entities as well as

natural persons. Although some of the provisions of the Code of 2016

had come into effect from May 28, 2016, the provisions of the Code of

2016 under challenge in the writ petition have come into effect from

December 1, 2016. Prior thereto, the Companies Act, 2013 and even

prior thereto the Companies Act, 1956 dealt with the insolvency issues

of a Company incorporated or existing under such Act.

A company has various stakeholders. Creditors of a company are

one of the stakeholders. Prior to the concepts of financial and

operational creditors being introduced through the Code of 2016, a

creditor of a company was classified broadly under three categories,

namely, secured creditor, unsecured creditor and statutory creditor.

The Code of 2016 segregates creditors of a company into two broad

categories of financial and operational creditor. In addition to the three

classifications of creditors existing prior to the Code of 2016, it now

seeks to introduce financial and operational creditors. The definition of

financial creditor appears in Section 5(7) which is to be read along with

Section 5(8) and Section 3(10) of the Code of 2016. Essentially a

financial creditor means a creditor whose claim arises out of a

transaction in liquidity entered into by such creditor with the company.

A financial creditor can be either a secured creditor or an unsecured

creditor. An operational creditor on the other hand is a creditor whose

claim arises out of a normal business transaction that such creditor

may have had with the legal entity. It would include money receivable by

an employee or a worker of the company as wages or salary. It would

also include a claim of a statutory authority on account of money

receivable pursuant to an imposition by a statute. The classification of a

creditor of a company as secured, unsecured and statutory creditor

stands to be replaced by financial or operational creditor of a company

in the initiation of an insolvency proceeding of a Company under the

Code of 2016. The three categories of secured, unsecured and statutory

creditors, however, have their say also in specified circumstances under

the Code of 2016. A secured or unsecured or statutory creditor is

reclassified as financial or an operational creditor under the Code of

2016. A creditor of a Company when involved in an insolvency

proceeding of a company under the Code of 2016 does not lose the

character of being either a secured or unsecured or statutory creditor, of

such company as the case may be. However, in the insolvency

proceedings, under the Code of 2016, a creditor is also classified as a

financial or an operational creditor to deal with the insolvency

proceeding of a company. The Code of 2016 seeks to classify the

creditors of a company in the two broad categories as noted above. The

distinctions of secured, unsecured and statutory creditor are not

obviated in its entirety. These concepts apply at a given stage of the

insolvency proceeding. The Code of 2016 while recognizing a creditor as

a secured or unsecured or statutory creditor shifts the emphasis of a

creditor to being a financial or operational creditor at specified stages of

the insolvency proceeding of a Company.

Classification amongst similarly situated persons is permissible if

the classification is based on reasonable differentia. If the classification

is on reasonable differentia it does not offend the principle of equality.

Consequently, creditors of a company can be classified, provided the

classification is on reasonable differentia. Financial and operational

creditors are defined in the Code of 2016. The definitions of a financial

and an operational creditor as obtaining in the Code of 2016 can be said

to have certainty and exactitude. The classification made by the Code of

2016 amongst the creditors of a company is on reasonable differentia.

The differentia introduced by the Code of 2016 in respect of a creditor of

a company does not offend any provisions of the Constitution of India.

At least the same is not the argument of the parties before Court. What

has been argued is that, the differentiation between the two creditors is

such that, one of the classified creditors, that is to say, the financial

creditor takes precedence over the operational creditor. Whether the

treatment of a financial creditor on pedestal higher than an operational

creditor and bestowing a higher or better right, so to speak, to a

financial creditor is just and proper or whether the same offends any

provisions of the Constitution of India requires consideration.

The insolvency process prior to the coming into effect of the Code of

2016 was found to be inadequate to deal with the issues of insolvency of

both legal entities and that of natural persons. The existing framework

for insolvency and bankruptcy resolution was found to be ineffective and

causing undue delay. Few committees and commissions had made

recommendations for consolidating the insolvency and bankruptcy laws.

The Bankruptcy Law Reforms Committee recommended the Insolvency

and Bankruptcy Code. The issue of composition of the committee of

creditor for insolvency resolution of a company was considered by the

Bankruptcy Committee chaired by Dr. T.K. Viswanathan. The report

explains the reasoning behind the composition of the Committee of

creditors by the financial creditor and a preference being given to the

financial creditors against the operational creditors:-

“The Committee deliberated on who should be on thecreditors committee, given the power of the credits committee toultimately keep the entity as a going concern or liquidate it. TheCommittee reasoned that members of the creditors committeehave to be creditors both with the capability to access viability,as well as to be willing to modify terms of existing liabilities innegotiations. Typically, operational creditors are neither able todecide on matters regarding the insolvency of the entity, nor

willing to take the risk of postponing payments for better futureprospects for the entity. The Committee concluded that, for theprocess to be rapid and efficient, the Code will provide that thecreditors committee should be restricted to only the financialcreditors.”

An operational creditor is not ousted in its entirety from coming

into the committee of creditors. An operational creditor does not have a

voting right in the event it is in the committee of creditors.

The Code of 2016 is in the economic sphere. In Bhavesh D. Parish

& Ors. (supra) the Supreme Court has expressed the view that, the

Court should be slow in staying the applicability of a piece of legislation

particularly in the economic spheres even if arguable points are raised

unless such provisions are manifestly unjust or glaringly

unconstitutional. In P. Laxmi Devi (supra) the Supreme Court has held

that, the Courts while dealing with legislations particularly in economic

matters should presume in favour of the constitutionality of a statute. It

has held in paragraph 73 as follows:-

“73. All decisions in the economic and social spheres areessentially ad hoc and experimental. Since economic mattersare extremely complicated, this inevitably entails specialtreatment for special situations. The State must therefore be leftwith wide latitude in devising ways and means of fiscal orregulatory measures, and the court should not, unlesscompelled by the statute or by the Constitution, encroach intothis field, or invalidate such law.”

The Bankruptcy Committee gives a rationale to the financial

creditors being treated in a particular way vis-à-vis an operational

creditor in an insolvency proceeding with regard to a company. The

rationale is a plausible view taken for an expeditious resolution of an

insolvency issue of a company. Courts are not required to adjudge a

legislation on the basis of possible misuse or the crudities or inequalities

that may be perceived to be embedded in a legislation. The rationale of

giving a particular treatment to a financial creditor in the process of

insolvency of a company under the Code of 2016 cannot be said to

offend any provisions of the Constitution of India. Sree Metaliks

Limited & Anr. (supra), Innoventive Industries Limited (supra) and

Mobilox Innovations Private Limited (supra) did not decide the issues

of vires of the provisions of the Code of 2016 as sought to be urged in

the present petition.

Kanak Exports & Anr. (supra) has held that, experimentation in

economic matters is permissible. R.K. Garg (supra) has held that, the

possibility of abuse of a piece of legislation is no ground for it to be

struck down. Rakesh Kohli & Anr. (supra) has held that, unless the

Court is of the view that, there is a flagrant violation of the Constitution

of India, it should not be struck down a piece of statute as

unconstitutional. The Court should presume the constitutional validity

of a statute as has been held in Satish Kumar Batra & Ors. (supra).

The contentions of breach of principles of natural justice were

raised and considered in Sree Metaliks Limited & Anr. (supra) and

Innoventive Industries Limited (supra). Such contentions were found

to be misplaced. Nothing is placed on record that, a different view

should be taken on the ground of breach of principles of natural justice

in a proceeding under the Code of 2016.

In such circumstances, W.P. No. 672 of 2017 fails. The same is

dismissed. No order as to costs.

[DEBANGSU BASAK, J.]